We want you to completely grasp each tool’s strengths and drawbacks so you can choose which ones work for you and which ones don’t. Let’s start with the fundamentals. Indicators are classified into two types: leading and lagging. A leading indicator signals the onset of a new trend or reversal.
These indicators assist you in making money by forecasting what prices will do next.
Leading indicators typically function by determining if something is “overbought” or “oversold.”
This is done with the expectation that if a currency pair is “oversold,” it will recover.
A lagging indicator signals after the trend has begun, essentially saying, “Hey buddy, pay attention, the trend has begun, and you’re missing the boat.”
When prices move in relatively lengthy trends, lagging indicators perform well.
They do not, however, warn you of any impending price changes; instead, they just inform you what prices are doing (increasing or falling) so that you can trade accordingly.
You’re probably thinking, “Ooooh, I’m going to get rich with leading indicators!” because you would be able to profit from a new trend right from the start
If the leading indicator was correct every time, you would “catch” the entire trend every time. But it won’t be.
Fakeouts are common when using leading indications. Leading indicators are renowned for producing false signals that can “mislead” you.
The alternative option is to employ lagging indicators, which are less prone to false signals.
Lagging indicators only provide signals once the price shift has definitely formed a trend. The disadvantage is that you would be a little late in entering a position.
Lag indicators cause you to purchase and sell late. However, they dramatically lower your risk by keeping you on the right side of the market in exchange for missing any early possibilities.
For the purposes of this lesson, let’s divide all of our technical indicators into two groups:
1. Leading indicators or oscillators
2. Lagging or trend-following indicators
While they might be supportive of one another, they are more prone to disagree.
In sideways markets, lagging indicators are ineffective.
But do you know what does? Leading Indicators
Yes, leading indicators perform best in markets that are sideways or “ranging.”
The general rule is to employ lagging indicators in trending markets and leading indicators in sideways situations.
We’re not suggesting that one or the other be utilized exclusively, but you should be aware of the possible drawbacks of either.
Next Lesson: How to Use Oscillators to Predict Trend Endings